The Netwealth Group Ltd (ASX: NWL) share price has dropped more than 10% after announcing a change in its deposit arrangement.
Why is the Netwealth share price being crunched?
Netwealth has told investors that its agreement with Australia and New Zealand Banking Group Ltd (ASX: ANZ) for the interest payable on the total pooled cash transaction accounts is to be terminated in 12 months, on 24 March 2022.
The agreement between Netwealth and ANZ Bank provides a margin of 95 basis points (0.95%) above the overnight cash rate (OCR) and will continue for 12 months.
What caused ANZ to end the agreement?
Netwealth explained that as a result of COVID-19 and current global economic conditions, the Reserve Bank of Australia (RBA) has reduced and maintained the official interest rate of 10 basis points (0.10%) and provided substantial liquidity to the Australian banking sector at historically low rates and credit spreads.
In other words, Netwealth seems to be saying that ANZ doesn’t need the funding from Netwealth that much, so it doesn’t want the existing arrangement to continue.
How is Netwealth going to respond?
Management said that the company is in negotiations with ANZ and other banks to establish an alternate facility and deposit rate.
The company said that, in addition, the previously announced reductions in the RBA overnight rate which reduced the cash administration margin by 40 basis points will be progressively recovered by when rates increase in the future.
It reminded investors that it remains debt free and in a strong financial position.
My thoughts on this development
Netwealth is a quality business with good growth prospects with its core offerings. It’s not one of the ASX shares that I follow very closely, but it’s clear that the money it makes from the cash deposits are a significant part of the picture for investors.
Whilst falling interest rates may help with increasing asset values, it can have a negative impact on businesses that hold large amounts of cash, or are responsible for high levels of cash, like Netwealth.
I don’t think that interest rates are going to stay this low forever, so this short term selloff could be a long term opportunity. But I’m not sure what the right earnings multiple for a business like Netwealth is, so I’m not jumping at this opportunity.
Before you consider Netwealth, I suggest getting a free Rask account and accessing our full stock reports. Click this link to join for free and access our analyst reports.